• Aggregate deficits in defined benefit schemes totalled a record £384 billion at the end of June 2016.
• The market reaction to Brexit has kicked another big hole in pension schemes’ funding levels.
• Some trustees will also fear that employers are now less well placed to step in to support their schemes if things go wrong.

The Pension Protection Fund (PPF) estimates that aggregate deficits in defined benefit schemes totalled a record £384 billion at the end of June 2016, up from £295 billion a month earlier. The highest deficit previously recorded was £368 billion in January 2015.

These figures estimate the cost of paying insurance companies to secure the reduced level of benefits that scheme members can receive through PPF compensation if the scheme’s sponsoring employer becomes insolvent. Graham McLean, head of pension scheme funding at Willis Towers Watson, said: “The deficits that employers need to pay off are measured differently – they don’t assume that benefits will be cut back to PPF levels, but they typically use less cautious assumptions.

“On any measure, though, the market reaction to Brexit has kicked another big hole in pension schemes’ funding levels. Assets have grown – at least when measured in sterling – but not quickly enough to keep pace with the increased cost of paying promised benefits in a world where interest rates and expected returns on assets are lower. Some trustees will also fear that employers are now less well placed to step in to support their schemes if things go wrong. If this leaves them less prepared to take risks with their schemes’ investments, plans to repair deficits will rely more heavily on employers getting the chequebooks out. 

“Before the referendum, the Pensions Regulator was encouraging companies negotiating new funding agreements with pension trustees to pay higher contributions, so that bigger deficits could still be cleared according to the timetables they agreed three years earlier. We’re waiting to see whether its post-Brexit update offers companies more breathing space. As always, the Regulator will need to walk a tightrope between getting money out of employers while it can and not undermining employers’ ability to stand behind the scheme in future. It may try to distinguish between companies paying substantial dividends and those it sees as seriously cash-constrained.

“Regulatory guidance could be just a sticking plaster while we wait for a wider policy response. The Work and Pensions Secretary said this week that there is a ‘very real systemic issue with DB pension schemes that we need to look at’, but there are no easy answers. Allowing profitable companies to pare back the pension promises they have already made would be politically difficult, to say the least. The Pensions Minister recently suggested that deficits might be measured differently, but there is already plenty of flexibility within the current funding rules. Members may not be reassured if they hear that ‘skinny mirrors’ are being used to make shortfalls look smaller than they are.”